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Price Discrimination and Social Welfare with Demand Uncertainty

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Author Info
Mahmudul Anam () (York University, Canada)
Shin-Hwan Chiangy () (York University, Canada)
Abstract

Price, output and welfare erects of third-degree price discrimination is analyzed in the context of a risk-averse monopolist, who commits to xed prices before the revelation of random and potentially correlated demands. Assuming the disturbance term to be additive, white noise and the monopolist to have a quadratic (mean-variance) utility function, we show that price discrimination may occur with identical expected demands, the relatively risky but price insensitive market may be charged the lower price and despite linear demands, aggregate expected output may fall while social welfare rises. All of these results, which run counter to those in the deterministic model, are shown to be driven by the asymmetry in the revenue and risk characteristics of the markets and the willingness of the monopolist to trade increased level for reduced risk of expected prot in a manner similar to portfolio choice with risky and correlated assets. Key Words: Monopoly (D42), Monopolization Strategies (L12), Decision Making under Risk and Uncertainty (D81)

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File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/pd.pdf
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File Function: First version, 1999
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Publisher Info
Paper provided by York University, Department of Economics in its series Working Papers with number 1999_04.

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Length: 17 pages
Date of creation: Sep 1999
Date of revision:
Handle: RePEc:yca:wpaper:1999_04

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Keywords:

Find related papers by JEL classification:
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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  1. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654 Elsevier. [Downloadable!] (restricted)
  2. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-47, March. [Downloadable!] (restricted)
    Other versions:
  3. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September. [Downloadable!] (restricted)
  4. Layson, Stephen K, 1998. "Third-Degree Price Discrimination with Interdependent Demands," Journal of Industrial Economics, Blackwell Publishing, vol. 46(4), pages 511-24, December. [Downloadable!] (restricted)
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